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The Case for a Positive Euro Area Inflation Target: Evidence from France, Germany and Italy

Klaus Adam (), Erwan Gautier (), Sergio Santoro () and Henning Weber
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Sergio Santoro: Bank of Italy

No 1344, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Using micro price data underlying the Harmonized Index of Consumer Prices in France, Germany and Italy, we estimate relative price trends over the product life cycle and show that minimizing price and mark-up distortions in the presence of these trends requires targeting a significantly positive inflation target. Relative price trends shift the optimal inflation target up from a level of zero per cent, as suggested by the standard sticky price literature, to a range of 1.1-2.1 per cent in France, 1.2-2.0 per cent in Germany, 0.8-1.0 per cent in Italy, and 1.1-1.7 per cent in the euro area (three-country average). Differences across countries emerge due to systematic differences in the strength of relative price trends. Other considerations not taken into account in the present paper may push up the optimal inflation targets further. The welfare costs associated with targeting zero inflation turn out to be substantial and range between 2.1 and 4.5 per cent of consumption in present-value terms.

Keywords: Optimal inflation target; micro price trends; welfare (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2021-10
New Economics Papers: this item is included in nep-mac and nep-mon
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Related works:
Journal Article: The case for a positive euro area inflation target: Evidence from france, germany and italy (2022) Downloads
Working Paper: The Case for a Positive Euro Area Inflation Target: Evidence from France, Germany and Italy (2021) Downloads
Working Paper: The Case for a Positive Euro Area Inflation Target: Evidence From France, Germany and Italy (2021) Downloads
Working Paper: The Case for a Positive Euro Area Inflation Target: Evidence from France, Germany and Italy (2021) Downloads
Working Paper: The case for a positive euro area inflation target: evidence from France, Germany and Italy (2021) Downloads
Working Paper: The case for a positive euro area inflation target: Evidence from France, Germany and Italy (2021) Downloads
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